Report Says Oil Royalties Go Unpaid

By EDMUND L. ANDREWS

Published: December 7, 2006

An eight-month investigation by the Interior Department's chief watchdog has found pervasive problems in the government's program for ensuring that companies pay the royalties they owe on billions of dollars of oil and gas pumped on federal land and in coastal waters.

In a scathing report to Congress, the Interior Department's inspector general says the agency's data are often inaccurate, that its officials rely too heavily on statements by oil companies rather than actual records and that only about 9 percent of all oil and gas leases are being reviewed.

The report undermines claims by top Interior officials that the department is aggressively pursuing underpayments and outright cheating by companies that drill on property owned by the American public.

And though investigators did not attempt to estimate the amount of money that the government might be losing, they cited a host of weaknesses that make the government vulnerable to being short-changed.

Interior officials defended the program on Wednesday, but announced that they would develop ''an action plan'' to address the inspector general's recommendations.

The report comes as lawmakers in both parties have been attacking the Interior Department for failing to correct blunders that department officials now concede could cost the government as much as $10 billion over the next five years.

It also reinforces complaints by critics, from auditors within the agency to lawmakers in both parties, who have said that enforcement has become superficial, prone to errors and overly deferential to oil companies.

These are among the inspector general's findings:

Since 2000, the number of audits has declined by 22 percent and the number of auditors has been reduced by 15 percent, even though soaring energy prices have doubled the total amount of money at stake, to about $10 billion a year.

Though the Interior Department says it has ''reviewed'' about 72 percent of all revenues from federal leases, it actually examined only 9 percent of all properties and 20 percent of all companies.

The department's ''compliance review'' system, a computerized form of fact-checking that has increasingly replaced audits, essentially relies on the word of the oil companies being monitored. Officials conducting such reviews do not ask companies for their actual records.

Government data are incomplete and often inaccurate, making it almost impossible for enforcement officials to develop strategies for selecting companies for special scrutiny.

The report said the agency's follow-up efforts were often sketchy, because officials who identified underpayments by companies did not have a procedure for verifying that the agency actually billed the companies or collected the money.

It also said the agency's statistics about recovering money were incomplete, inaccurate and sometimes misleading. The investigators said they could not even determine how many audits the government completed each year or whether the government recovered as much it had identified in underpayments.

In response to the report, the Interior Department said it was preparing a ''comprehensive plan'' to act on many of the recommendations. In a written statement, the department's Minerals Management Service, which oversees the royalty collection program, said it would deliver the plan to the inspector general within 30 days.

''We appreciate the work of the Inspector General's office,'' Johnnie M. Burton, director of the department's Minerals Management Service, said in a written statement.

Last month, the Interior Department said that it had created an independent advisory panel to review complaints about the royalty program. But at the time, officials said they did not believe there were serious problems.

''While I think there's a lot of room for improvement, I've not been able to find anything that's drastically wrong,'' C. Stephen Allred, assistant secretary of the Interior for Land and Minerals Management, said in an interview last month.

The new panel will be led by a man with close ties to the oil industry, David T. Deal, a former assistant general counsel for the American Petroleum Institute.

Democratic lawmakers said the new report amounted to a broad indictment of the Interior Department's unwillingness to scrutinize oil companies and protect the interests of taxpayers.

''This report is a blistering, scalding indictment of the Minerals Management Service,'' said Representative Edward J. Markey, Democrat of Massachusetts and a longtime critic of the Interior Department's handling of the royalty program. ''It says that, rather than being a cop on the beat, they were turning a blind eye to obvious flaws in the auditing system.''

Representative Carolyn Maloney, Democrat of New York and a member of the House Government Reform Committee, said the report would lead to broader investigations of the oil and gas leasing program when Democrats take control of the House and Senate in January.

''That gushing sound you hear is our government leaking royalties owed to American taxpayers from the oil and gas companies,'' Ms. Maloney said Wednesday. ''They are going to have some explaining to do next year when there's new leadership in Congress.''

Since President Bush took office, the Interior Department has shifted as much enforcement effort as possible from traditional audits of oil companies to the computerized ''compliance review'' system.

The new report is the result of an investigation that began in March, in response to questions posed by the Senate Energy Committee after The New York Times reported that royalties for natural gas had climbed far more slowly than market prices and that both federal and state auditors were complaining that the new system was inadequate.

Earl E. Devaney, the Interior Department's inspector general, has sharply criticized the department on numerous occasions. In 2004, his office described the royalty auditing program as frequently unprofessional, with auditors who were often unqualified and supervisors who were often ineffective.

In September, Mr. Devaney told the House Government Reform Committee that the Interior Department had tolerated cronyism, ethical breaches and cover-ups of major management blunders.

The new report does not condemn the department's growing use of ''compliance review,'' noting that the Internal Revenue Service has long used computerized systems to spot signs of cheating.

''Compliance reviews are a legitimate tool for evaluating the reasonableness of company-reported royalties,'' the report said.

But the investigators warned that the reviews ''do not provide the same level of assurance as an audit, and should only be used in conjunction with audits.''

When asked by the Senate Energy Committee whether the agency was spending enough money to do its job properly, the investigators said they could not answer because the agency ''lacked reliable information to allow us to conduct such an analysis.''